The Securities and Exchange Commission’s (SEC) marketing rule for investment advisers has been in effect for nearly a year, and it had several implications for investment advisers and the financial landscape. The new marketing rule is designed to protect investors by ensuring that they receive accurate and transparent information about investment advisory services. Investment advisers who comply with the new rule will be well-positioned to provide their clients with the information they need to make informed investment decisions.
Nearly nine months after the rule went into effect, the SEC has announced a slew of enforcement actions against firms for violating the rule. Most recently, the SEC announced charges against nine registered investment advisers for advertising hypothetical performance to the general public on their websites without adopting and or implementing policies and procedures required by the marketing rule.
All nine firms have agreed to settle the SEC’s charges and to pay $850,000 in combined penalties.
The SEC’s recent enforcement actions serve as a reminder to investment advisers of the importance of complying with the SEC’s marketing rule.
The SEC’s first enforcement actions for a marketing rule violation
The SEC alleged that a firm made misleading statements about its hypothetical performance metrics and failed to comply with certain disclosure requirements. The firm consented to the entry of an order by the SEC finding the violations and imposing sanctions.
The SEC’s order found that the firm made the following violations:
- Misleading hypothetical performance disclosures.
The firm advertised hypothetical performance results of up to 2,700% for its crypto strategy without disclosing material information about the assumptions underlying the projections.
- Failure to comply with marketing rule requirements for hypothetical performance.
The firm advertised hypothetical performance metrics without having adopted and implemented the required policies and procedures or taking other steps required by the SEC’s marketing rule. The marketing rule was amended in December 2020 to allow for the use of hypothetical performance metrics, but only if advisers comply with certain requirements designed to prevent fraud.
- Conflicting disclosures about custody of crypto assets.
The firm made conflicting disclosures to clients about how it custodied their crypto assets.
- Misleading liability disclaimer language.
The firm included liability disclaimer language in its client advisory agreements that created the false impression that clients had waived non-waivable causes of action against the firm.
- Failure to adopt policies and procedures about employee personal trading in crypto assets.
The firm failed to adopt policies and procedures concerning employee personal trading in crypto assets.
- Failure to obtain client signatures for certain transactions.
The firm failed to ensure that client signatures were obtained for certain types of transactions in client accounts.
The firm consented to the entry of a cease-and-desist order, a censure and to pay $192,454 in disgorgement, prejudgment interest and a civil penalty of $850,000. The civil penalty will be distributed to affected clients.
How your firm can avoid a marketing rule violation
The SEC’s enforcement action against the firm serves as a reminder to investment advisers of the importance of complying with the SEC’s marketing rule. Investment advisers should review their marketing materials and policies and procedures to ensure that they are following applicable regulations.
Here are some specific steps that investment advisers can take to avoid rule violations:
- Ensure that hypothetical performance disclosures are accurate and complete.
- Adopt and implement policies and procedures for complying with the marketing rule’s requirements for hypothetical performance. These policies and procedures should address, among other things, the selection of assumptions, the presentation of results, the use of disclaimers, and the qualifications of the audience viewing the hypothetical performance. Firms should not use hypothetical performance in open forums like websites or social media.
- Review marketing materials to ensure that they are accurate, fair and balanced.
- Adopt and implement policies and procedures for reviewing and approving marketing materials. These policies and procedures should ensure that marketing materials are compliant with applicable regulations.
- Provide training to employees on the marketing rule and other applicable regulations.
By taking these steps, investment advisers can help to avoid rule violations and protect investors.
For firms keen on an all-encompassing solution to bolster their evidencing practices, COMPLY stands as an indispensable ally. Learn more about the COMPLY consulting services and solutions and how we can help your firm avoid violations, prepare for regulatory changes, update your policies and procedures and more!